ACCOUNTING FOR BILLS OF EXCHANGE - Betsy...

[XI – Accountancy] 108

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CHAPTER-7

ACCOUNTING FOR BILLS OF EXCHANGE

Learning objectives

After studying this chapter, students shall be able to:

Explain the concept of Bill of Exchange and Promissory Note.

Distinction between Bill of Exchange and Promissory Note.

Define Important terms of Bill Exchange and Promissory Note.

Record the Accounting Treatment of Bill of Exchange under different

Circumstances

Suggested Methodology

Illustration-cum-Explanation Method.

A Bill of Exchange and Promissory Note both are legal Instruments which

facilitate the credit sale of goods by assuring the seller that the amount will be

recovered after a certain. Both of these are legal instruments under the

Negotiable Instruments Act, 1881.

BILL OF EXCHANGE

“A Bill of Exchange is an instrument in writing containing an unconditional

order signed by the maker, directing a certain person to pay a certain sum of

money only to, or the order of, a certain person or to the bearer of the

instrument.”

Section 5 of the Negotiable instrument Act, 1881

109 [XI – Accountancy]

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Features of a Bill Exchange are

1. A Bill of Exchange must be in writing

2. It must contain an order (and note a request) to make payment.

3. The order of payment must be unconditional.

4. The amount of bill of exchange must be certain.

5. The date of payment should be certain.

6. It must be signed by the drawer of the bill.

7. It must be accepted by the drawee by signing on it.

8. The amount specified in the bill exchange in payable either on demand

on the expiry of a fixed period.

9. The amount specified in the bill is payable either to a certain person or

to his order or to the bearer of the bill.

10. It must be stamped as per legal requirements.

PARTIES TO A BILL OF EXCHANGE

1. Drawer : Drawer is the person who makes or writes the bill of exchange.

Drawer is a person who has granted credit to the person on whom the

bill of exchange is drawn. The drawer is entitled to receive money from

the drawee (acceptor).

2. Drawee : Drawee is the person on whom the bill of exchange is drawn

for acceptance. Drawee is the person whom credit has been granted by

the drawer. The drawee is liable to pay money to the creditor/drawer.,.

3. Payee : Payee is the person who receives the payment from the drawees.

Usually the drawer and the payee are the same person. In the following

cases, drawer and payee are two different persons.

(i) When the bill is discounted by the drawer from his bank-payee

in the bank.



(ii) When the bill is endorsed by the drawer to his creditors, payee

is the endorsee.

Specimen of Bill of exchange

4Rs. 50,000 New Delhi6th August,2013

4Stamp

Three months after day pay to me or my order, the sum ofFifty thousand only

23 Value received

6

for

“Accepted,,

(Signed)

(Mukesh Chand.)(Signed)

ToMukesh ChandD-24, Sector-15Rohini Delhi-39

5SANT KANWAR151-, Sector-9Rohini Delhi-39

CONTENTS OF BILL OF EXCHANGE

1. Date : The date on which a bill is drawn, is written on the top right

corner of the bill. It helps in determining the date of maturity of the

bill.

2. Term/Tenure : Term specifies the time period for which a bill is written.

It should be specified in the body of the bill.

3. Amount : Amount in figure should be mentioned in the top lelf corner

and amount in words should be mentioned in body of the bill.

4. Stamp : Stamp of proper value depending upon the amount of bill

must be affixed on the bills of exchange.

5. Name of Parties : The name and addresses of the drawer and the

drawee should be mentioned in the bill of exchange.



6. For Value Received : It means the bill has been issued in exchange of

some consideration. These words are very important because law does

not consider those agreements which have been made without

considerations.

ADVANTAGES OF BILL OF EXCHANGE

1. It helps in purchases and sales of goods on credit basis.

2. It is a legally valid Document in the eyes of law. It assures uneasier

recovery to the drawer if drawee fails to make the payments.

3. A Bill can be discounted from the bank before its date maturity. By

discounting with the bank, drawer can get the money before due date

if required.

4. It can be easily transferred from one person to another by endorsement.

5. It helps in recovery of debt without sending reminders to the debtor.

6. It assures the seller about the timely recovery of debt. So a drawer and

drawn can plan about its cash management.

PROMISSORY NOTE

A Promissory note is an instrument in writing (not beings a bank note or

a currency note) containing an unconditional undertaking signed by the maker

to pay a certain sum of money only or to the order of a certain person or to

be the bearer of the instrument.

FEATURES OF PROMISSORY NOTE

1. There must be an unconditional promise to pay a certain sum of money

on a certain date.

2. It must be signed by the maker.

3. The name of the payee must be mentioned on it.

4. It must be stamped according to its value.



PARTIES TO PROMISSORY NOTE

1. The maker : The maker is the person who makes the promise to pay

the amount on a certain date. Maker of a bill must sign the promissory

note before giving it to the payee.

2. The Payee : The payee is the person who is entitled to get the payment

from the maker of promissory note. Payee is the person who has granted

the credit.

New Delh i7th Aug.2013

(Signed)Rajiv Verma95,Sector-16Rohini Delhi-85

GulabSingh18, Paschim ViharNew Delhi-63

To

Stamp

Rs. 2,00,000

Distinction between Bills of Exchange and Promissory Note:

Basis of difference Bills of Exchange Promissory Note

1. Drawer The Drawer is the creditor. The Drawer is the debtor.

2. No. Of Parties It has three parties namely: It has two parties namely:

• The drawer • The Maker

• The drawee • The payee

3. Order or It contains an order to It contains a promise to

Promise Make the payment. make the payment

4. Acceptance It is valid only when It does not require any

accepted by the drawee. acceptance from the drawee.

5. Payee It case of bill of exchange, Drawer or maker cannot

drawer can be the payee the payee of

of the bill Promissory note.

6. Noting It case of dishonour of bill Noting is not necessary

Noting becomes important. in case of dishonour of

7. Liability The liability of the drawer promissory note.

arises only if the drawee The liability of the drawer

fails to make payment (maker) is primary



IMPORTANT TERMS

1. Term of Bill :.The period intervening between the date on which a bill

is drawn and the date on which it becomes due for payment is called

“Term of Bill’.

2. Due Date : Due date is the date on which the payment of the bill is

due.

(i) In case of ‘Bill at Sight’

Due date is the date on which a bill is presented for the payment

(ii) In case of ‘Bill after date’-

Due Date - Date of Drawing + Term of Bill.

(iii) In case of ‘Bill after sight’-

Due date - Date of Acceptance +Term of Bill.

3. Days of Grace : Drawee is allowed three extra days after the due

date of bill for making payments. Such 3 days are know as ‘Days of

Grace’. It is a custom to add the days of grace.

4. Date of Maturity : The date which comes after adding three days

of grace to the due date of a bill is called “Date of maturity’.

Illustration 1 : A bill of exchange for Rs. 25,000 is drawn by A on B on 1st

April, 2013 for 3 Months, B accepted the bill on 10th April, 2013.

Find the DUE DATE and DATE OF MATURITY if

Cash I : The bill is Bill After date

Cas II : The bill is Bill After Sight

Solution:

Due Date Date of Maturity

Case I -When the Bill is

“Bill After date” 1st July 2013 4th July, 2013



Case II-When the Bill is

“Bill After Sight” 10th July 2013 13th July, 2013

• In case a bill is “Bill after Sight” term of bill starts from the date of

acceptance.

5. Discounting of Bill : When the bill is encashed from the bank before

its due date, it is known as discounting of bill. Bank deducts its charges

from the amount of bill and is disburses the balance amount.

Illustration 2 : Ram sold goods to shyam for Rs. 30,000 at credit on 1st April,

2013 Ram discounts the bill with his bank on 4th May 2013 @ 9% per annum

find out :

(i) The amount of discounting charges.

(ii) The amount that Ram will receive from his bank at the time of

discounting the bill.

Solution :

(i) Discounting Charges =

Amount of Bill Discounted Rate

100 Unexpired Period

9 230,000

100 12 Rs. 450

(ii) Ram will receive from his bank Rs. 29,550 (i.e. Rs.30,000–Rs. 450) at

the time of discounting the bill.

6. Endorsement of Bill : Endorsement of bill means the Process of

transferring the title of bill from the drawer or holder to their

creditors. The person transferring the title is called “ Endorser” and

the person to whom the bill is transferred called “Endorsee’. The

endorsee can further endorse the bill in favour of his creditors.

Endorsement is executed by putting the signature at the back of the

bill.



7. Bill sent for Collection : It is a process when the bill is sent to bank

with instruction to keep the bill till maturity and collect its amount

from the acceptor on the date of maturity.

8. Dishonour of Bill : When the drawee (or acceptor) of the bill fails

to make payment of the bill on the date of maturity, it is called

Dishonour of Bill.

9. Noting of Bill : To obtain the proof of dishonour of a bill, it is re-sent

to the drawee through a legally authorized persons called Notary Public

charges a small fee for Providing this service known as Noting charges.

Noting charges are paid to the Notary Public first by the holder of

the bill but are ultimately recovered from the drawee, because he

is the person responsible for the dishonour.

10. Retirement of a Bill : When the drawee makes the payment of the

bill before its due date it is called ‘Retirement of a bill’. In such a

case, holder of the bill usually allow a certain amount as Rebate to the

drawee.

Amount of rebate is calculated at a fixed percentage for the unexpired

period only.

Illustration 3 : On 1st January, 2013 A sold good to B for Rs. 30,000 and

drew upon him a bill at 3 months for the amount. B accepted the bill and

returned it to A. On 4th March, Calculate the amount of Rebate.

Solution :

Rebate = Amount of Bill Rate

100 Unexpired Period

12 130,000

100 12

= Rs. 300

B will pay Rs. 29,700 (Rs 30,000–Rs.300) to A at the time of retiring the bill.

11. Renewal of a Bill : Sometimes, the drawee of a bill finds himself

unable to meet the bill on due date. To avoid dishonouring of bill, he



may request the holder of the bill to cancel the original bill and draw

a new bill in place of old one. It the holder agrees, the old bill is

cancelled and a new hill with new terms is drawn on the drawee and

also accepted by him. This process is called ‘Renewal of a bill’.

In this case, Noting of the bill is not required as cancellation of the

bill is mutually agreed upon by both the parties of the bill.

Normally, the drawer charge interest for the period of new bill. The

interest may be paid in cash or may be added in the amount of new bill.

If any part payment is made at the time of renewal of a bill, interest is

calculated only on the outstanding amount.

Illustration 4 : Narender requests Rajnesh to renew his acceptance for

Rs. 25,000 for 3 month together with interest @ 18% p.a.

Calculate the amount of new bill drawn on Narender

Solution :

InterestRateAmount * Period of

Outstanding New Bill100

18 325,000 Rs.1,125

100 12

Amount of New Bill =Rs. 25,000 + Rs. 1,125

= Rs. 26,125

* Amount Outstanding = Amount of Bill cancelled- any part payment made

in cash at the time of renewal of bill

ACCOUNTING TREATMENT OF BILL TRANSACTIONS

A. On the Due Date bill is Honoured

The accounting treatment under this heading is based on the assumption

that bills duly honoured at maturity of the bill. The drawer can treat the bill

in the following ways :



Case-I : Bill is retained by the drawer till date of maturity

Transaction In the books of In the books of

Drawer Dravee

1. When Goods Drawee Dr. Purchases A./c Dr.

are sold on Credit To Sales A.c To Drawer

(Being goods Sold (Being goods purchased

on credit)from Drawer)

2. When Bill Bills Receivable A/c Dr. Drawer Dr.

is Drawn To Drawee To Bills Payable A/c

(Being acceptance (Being acceptance

received from drawee) given to drawer)

3. When Bills is Cash/Bank A/c Dr. Bills Payable A./c Dr.

Honoured on To Bills To Cash/Bank A/c

date of Maturity Receivable A/c

(Being payment of Bill (Being payment of bill

received from Drawee) made to drawer)

Case- II When the bill is discounted from the Bank by the Drawer


Drawer Dravee

1. When the bill Bank A.c Dr.

is discounted Discounting

from Bank Charges A/c Dr. No Entry

To Bills

Receivable A/c

(Being bill discounted

for the Bank

2. When the bill Bills Payable A/c Dr.

is honoured on No Entry To Cash/Bank A/c

date of maturity (Being the Payment of

bill made

Note :

• Discounting charges are always recorded (i.e. debited) in the books of

Drawer.



• In the books of Drawee, there is no effect of discounting the bill.

Case III : When bill is endorsed in favour of a creditor


Drawer/Endorser Dravee

1. When bill Endorsee Dr.

is endorsed To Bills

Receivable A/c No Entry

(Being bill receivable

endorsed)

2. When bill is Bills Payable A/c Dr.

Honoured on No Entry To Cash/Bank A/c

dated of maturity (Being the payment of bill

(made)

Transaction In the Books of Endorsee

1. When bill is endorsed Bills Receivable A/c Dr.

To Endorser

(Being bill received from debtor through

endorsement

2. When bill is honoured Cash/Bank A/c Dr.

on date of maturity To Bills Receivable

(Being Bill realised on date of maturity

Case- IV When Bill is sent to the Bank for collection


Drawer Dravee

1. When bill is Bills Sent for

sent for Collection A/c Dr.

collection To Bills No Entry

to Bank Receivable A/c

(Being bill sent for collection)

2. When the Bank A/c Dr. Bill Payable A/c Dr.

amount is To Bill Sent To Cash/Bank A/c

realised on for Collection A/c (Being bill paid

Date of (Being the bill sent for on date maturity.)

Maturity collection realised on

Maturity)



Note :

• There will be no effect in the books of Drawee either the bill is

discounted from the bank or endorsed to a creditor or sent to the bank

for collection. The drawee makes the payment in normal manner.

• It is only in the books of drawer where an additional entry is passed to

record the effect of the above transaction.

Illustration 5 : X sold goods to Y on 1st April, 2013 for Rs. 20,000 on credit

and drew upon him a bill for the same amount payable after 3 months. Y

accepted the bill and returned it to X. On the date of maturity bill was presented

to Y for the payment and he honoured it.

Pass the Journal Entries in the books of both the parties when:

Case I :Bill is retained by the X till the date of maturity.

Case II : Bill is discounted by X from his bank on 4th April @ 6% per annum.

Case III : Bill is endorsed in favour of Z on 4th May, 2013.

Case IV : Bill is sent to Bank for collection on 1st July, 2013.

Also record the Journal Entries in the books of Z (Case-III)

Solution :

In the book of X (Drawer)

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

2013

April, 1 Y Dr. 20,000

To Sales A/c

(Being goods sold to Y on credit) 20,000

April, 1 Bills Receivable A/c Dr. 20,000

To Y

(Being acceptance received from Y) 20,000

Case-1 When bill is retained by X

till the date of maturity



July, 4 Cash/Bank A/c Dr. 20,000

To Bills Receivable A/c 20,000

(Being amount received from B

against bill)

Case-II When bill is discounted by

X from his bank

April, 4 Bank A/c Dr. 19,700

Discounting Charges A/c Dr. 300


(Being the bill discounted

from the bank, discounting

charges are

6 320,000 Rs.300

100 12

Case-III when bill is Endorsed

in favour of Z

Z Dr. 20,000

May, 4 To Bills receivable A/c 20,000

(Being bill endorsed in favour of Z)

Case-IV When bill is sent to

bank for collection


July, 1 Bills Sent for Collection A/c Dr. 20,000


(Being bill sent for collection to bank)

July, 4 Bank A/c Dr. 20,000

To Bill sent for

Collection A/c 20,000

(Being amount realised

from bill sent for Collection)

Note :

1. First two entries passed on April 1,2013 will be same in the books of

X (Drawer) in all the 4 cases.

2. If a bill is honoured on the date of maturity.



NO ENTRY is passed on the date of maturity in the books drawer, if.

• Bill is discounted from the bank ; or

• Bill is endorsed in favour of creditor.

(in all 4 cases)

In the Books of Y (Drawee)

Journal


2013

April,1 Purchases A/c Dr. 20,000

To X 20,000

(Being goods purchased

from X on credit)

April,1 X Dr. 20,000

To Bills Payable A/c 20,000

(Being the acceptance

given to X)

July,4 Bills Payable A/c Dr. 20,000

To Cash /Bank 20,000

(Being payment made

on date of maturity)

(cases-III)

In the Books of Z (Endorsee)

Journal


2011

May,4 Bills Receivable A/c Dr. 20,000

To X 20,000

(Being bill received from X

through endorsement)

July,4 Cash/Bank A/c Dr. 20,000

To Bills Receivable A/c

(Being payment received 20,000

against bill)



B. When Bill is dishonoured on date of maturity.

Case I : Bill is retained by the drawer till date of maturity.

Transaction In the Books of Drawer In the Book of Drawee

When bill is Drawee Dr. Bills Payable A./c Dr.

dishonoured To Bills Noting charges A/c Dr.

Receivable A/c To Drawer

To cash A/c (with (Being bill dishonoured)

noting charges)

(Being bill dishonoured

Note :

Entry passed in the book of Drawee will be SAME in all cases.

Case II : Bill is discounted from the Bank

In the books of Drawer


Drawee Dr.

To Bank A/c

(Including noting charges)

(Being bill discounted from

bank dishonoured)

Case III- When bill is endorsed in favour of a creditor

(At the time of Dishonour of a Bill)



Drawee Dr

To Endorsee

(Including noting charges)

(Being bill dishonoured,

Earlier endorsed in favour

of creditor






Endorser Dr


To Cash A/c (Noting charges)

(Being bill dishonoured, received

through endorsement)

Case IV : When bill is sent for collection to Bank




Drawee Dr

To Bills Sent for

Collection A/c

To Bank A./c (Noting charges)

(Being bill sent to bank for

collection, dishonoured)

Notes :

1. Same Entry is passed in the books of Drawee at the time of dishonour

of a bill/

2. In the books of Drawer

(At the time of Dishonour of Bill)

Drawee Dr. (In all Cases)

To Bills Receivable A/c (Case-I)

To Cash A/c (Noting Charges)

OR

To Bank A/c (case -II)

(Including Noting Charges)

OR

To Endorsee A/c (case-III)

(Including Noting charges)



OR

To Bills Sent for Collection A/c (case-IV)

To Bank A/c (Noting Charges)

Illustration 6 : A sold good to B on April 1, 2013 for Rs. 20,000 on credit

and drew upon him a bill for the same amount payable after 3 months. B

accepted the bill and returned into to A. On the due date bill was dishonoured.

Case I : Bill is retained by A till the date of maturity.

Case II : Bill is discounted by A from his bank on 4th April, 2013 @ 6% per

annum.

Case III : Bill is endorsed in favour of C on April, 4th, 2013.

Case IV : Bill is sent to bank for collection on July 1, 2013.

Solution:

In the books of A (Drawer)

Journal


2013

April, 1 B Dr 20,000

To Sales A/c 20,000

(Being goods sold to B

on credit)

April,1 Bill Receivable A/c Dr. 20,000

To B 20,000

(Being bill received from B)

Case-I : When bill is retained by A

July, 4 B Dr. 20,000


(Being bill received from B

dishonoured)

Case -II : When bill is discounted

from the Bank



April, 4 Bank A/c Dr. 19,700



(Being bill discounted from the

Bank ; discounting charges are

62000 300)

100

July, 4 B Dr. 20,000

To Bank 20,000

(Being bill discounted from,

dishonoured on date of maturity)

Case-III : When bill is endorsed in

favour of ‘C’

April, 4 C Dr. 20,000


(Being bill endorsed in favour of C)

July, 4 B Dr. 20,000

To C 20,000

(Being bill received from B and

endorsed to C dishonoured on

maturity date)

Case - IV : When bill sent for

collection

July, 1 Bill Sent for Collection A/c Dr. 20,000

To Bills Received A/c 20,000

(Being bill received from B sent

for collection)

July, 4 B Dr. 20,000

To Bills Sent for Collection A/c 20,000

(Being bill sent for collection to bank,

dishonoured on date of maturity.

In the Books of (Drawee) (In All Cases)


2013

April, 1 Purchases A/c Dr 20,000

To A 20,000

(Being goods purchased on credit)



April, 1 A Dr. 20,000

To Bill Payable A/c 20,000

(Being acceptance give to A)

July, 4 Bills Payable A/c Dr. 20,000

To A 20,000

(Being bill Payable to

A dishonoured on date of Maturity)

Illustration 7 : A sold goods to B on May 1st, 2013 for Rs. 30,000 on credit

and drew upon him a bill for the same amount payable after 2 months. B

accepted the bill and returned it to A. On date of maturity, B fails to make

payment of bill. Noting charges amounted to Rs.100.

Pan Journal Entries in the books of A and B if.

Case 1: A retains the bill till the date of maturity and also paid the noting

charges.

Case 2: A discounts the bill from his bank on 4th June @12% per annum.

Noting charges has been paid by bank.

Case 3: A endorses the bill in favour of C on June 1. C paid the noting

charges.

Case 4: A sent the bill to his bank for collection on July 1. Bank paid the

noting charges.

Solution

In the Books of a (Drawer)


2013

May, 1 B Dr 30,000

To Sales A/c 30,000

(Being goods sold to B on Credit)

May, 1 Bills Receivable A/c Dr. 30,000

To B 30,000

(Being acceptance received from B)

Case 1 : When A retains the bill



July, 4 B Dr. 30,100


To Cash A/c 100

(Being bill dishonored and noting

charges paid by A)

Case 2 : When bill is discounted

from the bank

June, 4 Bank A/c Dr. 29,700



(Being bill discounted from the 30,000

bank, discounting charges amount

to12 1

* 30,000 Rs. 300)100 12

July, 4 B Dr. 30,100

To Bank A/c 30,100

(Being bill discounted from bank

dishonoured and noting charges

Paid by bank)

Case 3 : When bill is endorsed

in favour of C

June, 1 C Dr. 30,000



collection)

July, 4 B Dr. 30,100

To C 30,100

(Being bill received from B and

endorsed to C dishonoured on

maturity)

Cash 4 : When bill sent for collection

July, 1 Bill Sent for Collection A/c Dr. 30,000



collection)



July, 4 B Dr. 30,100

To Bills Sent for

Collection A/c 30,000

To Bank 100

(Being bill received from B

dishonoured on maturity)

In the Book of B (DRAWEE)

(in all Cases)


2013

May, 1 Purchases A/c Dr 30,000

To A 30,000

(Being goods purchased from A)

May, 1 A Dr. 30,000


(Being acceptance given to A)

July, 4 Bills Payable A/c Dr. 30,000

Noting Charges A/c Dr. 100

To A 30,100

(Being bill dishonoured and

noting charges debited)

C. Renewal of a Bill


Cancelling the Drawee Dr. Bills Payable A./c Dr.

Original Bill To Bills Receivable A/c To Drawer

(Being the cancellation of bill (Being the bill payable cancelled)

receivable)

Recording Drawee Dr. Interest A/c Dr.

Interest for To Interest A/c To Drawer

extended (Being interest charged for (Being interest payable for

Period extended period) extended period)



Part Payment Cash or Bank A/c Dr. Drawer Dr.

Received/made To Drawee To Cash Bank A/c

(Being the part payment (Being the part payment

received) received)

New Bill Bills Received A/c Dr. Drawer Dr.

Drawn To Drawee To Bills Payable A/c

Accepted (Being a new bill drown) (Being a new bill accepted)

Note :

No Entry for Noting charges is passed at the time of cancellation of

original bill because both the parties are mutually agreed the old bill.

Illustration 8 : On 1st April, 2013 Anil accepts a bill drawn by Sunil for 2

months for Rs. 15,000, in payment of a debt. On the date of maturity bill was

dishonoured and Sunil had to pay Rs. 150 as noting charges. On the 4th June

2013, Anil requested to Sunil to draw a new bill for the amount due. Sunil

agreed to draw a new bill for 73 days but he charged interest @ 15% per

annum in cash. This bill is duly met on its maturity.

Pass Journal entries in the books of both the parties.

Solution :

In the books of Sunil

Journal


2013

April, 1 Bills Receivable A/c Dr 15,000

To Anil 15,000

(Being acceptance received)

June, 4 Anil Dr. 15,150

To Bills Receivable A/c 15000

To Cash A/c 150

(Being bill dishonoured and noting

charges paid)



June, 4 Anil Dr. 454.50

To Interest A/c 454.50

(Being interest charged)

15 7315150 )

100 365

June, 4 Cash A/c Dr. 454.50

To Anil 454.50

(Being interest received in cash)

June, 4 Bills Received A/c Dr. 15,150

To Anil 15,150

(Being a new bill drown M Anil

and acceptance received)

Aug., 19 Bank A/c Dr. 15,150


(Being amount received on

Maturity of bill)

In the books of Anil (DRAWEE)

Journal


2013

April, 1 Sunil Dr. 15,000

To Bills Payable 15,000

(Being acceptance gave)

June, 4 Bills Payable A/c Dr. 15,000


To Sunil 15,150


noting charges due)

June, 4 Interest A/c Dr. 454.50

To Sunil 454.50

(Being interest payable to Sunil)



June, 4 Sunil Dr. 454.50

To Cash A/c 454.50

(Being interest paid in cash)

June, 4 Sunil Dr. 15,150


(Being acceptance of new bill given)

Aug., 19 Bills Payable A/c Dr. 15,150

To Bank A/c 15,150

(Being bill accepted, paid on

maturity

Illustration 9 : P sold goods to Q for Rs. 10,000 on January 1, 2013 and on

the same day draws a bill on Q for the same amount for 3 months. Q accept

it and returns it to P, who discounts it on 10th January, 2013 with his bank for

Rs. 9850. The acceptance is dishonoured on the due date and the Noting

charges were paid by bank being Rs.50.

On 4th April, Q paid Rs. 2,050 (including Noting charges) in cash and

accepted new bill at 3 months for the amount date P together with interest @

12% per annum.

Make Journal Entries in the books of P and Q to record transaction.

Solution :

Journal of P


2013

Jan., 1 Q Dr. 10,000

To Sales A/c 10,000

(Being goods sold to Q)

Jan., 1 Bills Receivable A/c Dr. 10,000

To Q 10,000


Jan.,10 Bank A/c Dr. 9,850



(Being bill discounted from Bank)



April 4 Q Dr. 10,050

To Bank 10,050

(Being bill discounted from bank

dishonoured and noting charges

Paid by bank)

April 4 Cash A/c Dr. 2,050

To Q 2,050

(Being part payment received in cash)

April 5 Q Dr. 240

To Interest A/c 240

(Being interest charged)

12 3Rs. 8000 )

100 12

April 4 Bills Receivable A/c Dr. 8,240

To Q 8,240

(Being a new bill drawn on

Q together with interest)

Journal of Q (DRAWEE)


2013

Jan. 1 Purchases A/c Dr. 10,000

To P 10,000


Jan. 1 P Dr. 10,000


(Being acceptance given to P)

April 4 Bills Payable A/c Dr. 10,000


To P 10,050


charges due)

April 4 P Dr. 2,050

To Cash A/c 2,050

(Being part payment made in cash)



Interest A/c Dr. 240

To P 240

(Interest payable for 3 months)

April 4 P Dr. 8,240


(Being acceptance given to P)

D. Retiring a bill under Rebate


When Drawee Cash/Bank A/c Dr. Bills Payable A./c Dr.

retires the bill Rebate A/c Dr. To Cash/Bank A/c

before date of To Bill Receivable A/c To Rebate A/c

maturity (Being the amount received (Being the amount paid before

before date of maturity and date of maturity and rebate

rebate allowed. received.)

Note :

1. In the books of Drawer, Rebate Account is DEBITED because it is a

loss for Drawer.

2. In the books of Drawee, Rebate Account si CREDITED because it is

a gain for Drawer.

Illustration 10 : Mukesh sold goods to Jitender on July 1,2013 for Rs. 30,000

and drew a bill for the same amount for 3 months. Jitender accepted the bill

and returned it to Mukesh, Jitender retired his acceptance on 4th August, 2013

under rebate of 8% per annum. Give Journal entries in the books of Mukesh

and Jitender.

In the books MUKESH

Journal


2013

July 1 Jitender Dr. 30,000

To Sales A/c 30,000

(Being goods sold on credit)



July 1 Bill Receivable A/c Dr. 30,000

To Jitender 30,000


Aug. 4 Cash A/c Dr. 29,600

Rebate A/c Dr. 400


(Being amount received on bill

before maturity and rebate allowed,

Rebate 2 8

Rs. 30,000 Rs. 400)12 100

In the books of JITENDER

Journal


2013

July 1 Purchases A/c Dr. 30,000

To Mukesh 30,000


July 1 Mukesh 30,000


(Being acceptance given to Mukesh

Aug. 4 Bill Payable A/c Dr. 30,000

To Cash A/c 29,600

To Rebate A/c 400

(Being acceptance retired with rebate)

Illustration II : Rajiv sold goods to Pankaj for Rs. 40,000 on January 1st,

2013. On the same date Rajiv drew a bill of the same amounted 3 months on

Pankaj. The bill was accepted by Pankaj. Rajiv discounted the bill with his

bank on 4th February, 2013 @ 12% per annum. On date of maturity, the bill

was dishonoured and Noting charges Rs. 200

Pankaj agreed to Pay Rs. 10,200 and accepted another bill for the remaining

amount for 3 months together with interest @ 9% per annum. On due date

Pankaj make the payment.

Give Journal Entries in the books of Rajiv and Pankaj.



Solution

In the books of RAJIV (DRAWER)

Journal


2013

Jan. 1 Pankaj Dr. 40,000

To Sales A/c 40,000

(Being goods sold on credit)

Jan. 1 Bill Receivable A/c Dr. 40,000

To Pankaj 40,000


Feb. 4 Bank A/c Dr. 39,200


To Bill Receivable A/c 40,000

(Being bill discounted from

bank and discounting charges

are Rs. 800 :

12 240,000 )

100 12

April 4 Pankaj Dr. 40,200

To Bank A/c 40,200


charges paid by bank).

April 4 Cash A/c Dr. 10,200

To Pankaj 10,200

(Being part payment received

from Pankaj)

April 4 Pankaj Dr. 675

To Interest A/c 675

(Being Interest charged on

remaining amount :

9 330,000 )

100 12



April 4 Bills Receivable A/c Dr. 30,675

To Pankaj 30,675

(Being new acceptance received)

July 7 Cash A/c Dr. 30,675


(Being bill met on maturity)

In the books of PANKAJ (DRAWEE)

Journal


2013

Jan. 1 Purchases A/c Dr. 40,000

To Rajiv 40,000


Jan. 1 Rajiv Dr. 40,000


(Being acceptance given)

April 4 Bills Payable A/c Dr. 40,000


To Rajiv 40,200


noting charges due)

April 4 Rajiv Dr. 10,200

To Cash A/c 10,200

(Being part payment made)

April 4 Interest A/c Dr. 675

To Rajiv 675

(Being interest due)

April 4 Rajiv Dr. 30,675


(Being the new acceptance

given to Rajiv)

July 4 Bills Payable A/c Dr. 30,675

To Cash A/c 30,675

(Being bill met on maturity)



Points of Remember

1. When calculating Date of Maturity the following point must be

considered:

(i) In case “Bill at Sight” or “Bill on demand” 3 days of grace are

NOT allowed.

(ii) When the term of bill is mentioned in no of days, then

Date of drawing the bill is not included.

Date of payment is included in determining date of

maturity.

If date of maturity falls on a day which is public holiday,

the maturity date of the bill shall be “PROCEEDING

DAY’.

If maturity date is on an emergent holiday declared under

the Negotiable Installment Act. 1881, the next. working

day immediately after the holiday will be considered as

the date of maturity.

(iii) When the period is stated in months the date of maturity shall

be calculated in terms of calender months ignoring the no. of

days in a month.

2. Noting Charges

(i) Noting charges are not inexpensive for the drawer.

(ii) It is always debited as ‘Noting charges’ in the books of drawee.

(iii) Noting charges are recovered by drawer from drawee.

(iv) Noting charges are paid only when noting of the bill is necessary

at the time of DISHONOUR of bill.

(v) Noting of the bill is NOT required when the bill is CANCELLED

with the mutual consent of both the parties, specially at the time

of RENEWAL of Bill.

ACCOUNTING FOR BILLS OF EXCHANGE - Betsy...

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